Testing for Stationarity Using Covariates: An Application to Purchasing Power Parity
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We examine the evidence for Purchasing Power Parity using post Bretton Woods exchange rate data for twenty industrialized countries. The two tests we use are covariate tests for stationarity where the null hypothesis of stationarity is tested against the unit root alternative. These tests are generalizations of existing univariate stationarity tests and improve the power of univariate tests by utilizing information contained in related stationary covariates. We conclude that PPP holds for 17 out of the 20 countries tested.
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